At the cutting edge of new social innovation financing are social impact bonds (SIBs), a potentially transformative idea. SIB transactions merge traditional public/private partnerships and performance based contracting. Private investors invest in demonstrated social programs, with a promise from government to repay that investment, plus a profit, if predetermined performance targets are met.

The deals transfer risk from the government to the private sector and generate new capital to invest in evidence-based interventions that would otherwise go unfunded.

But on their current path, they are unlikely to fully achieve their promise. Today’s deals are bespoke, complex and have large transactional costs. They also replicate current mistakes in how government purchases services, rather than reforming that process.

Today’s deals are mainly efforts to fund well-intentioned programs that are appealing to all parties to the transaction: the government, investors, and social service providers. But in order to satisfy the interests of all parties whose incentives are not aligned, rather than creating real reform, they end up funding the lowest common denominator — something that sounds good, is low risk, but does not solve big problems.

There is a better way to use these transactions to create broader and deeper systems reform, using the SIB development process as the mechanism for reform.

The deals funded by social innovation financing should be the product of a real, intensive strategic planning process, rather than a one-off response to a particular opportunity.

Want to learn more about pay for success models like the social impact bond? Register now to participate in the July 24 Connecting Communities® webinar session, The Next Frontier of Community Development Finance: Pay for Success and Social Impact Bonds.